Litigation: Who reviewed the contractual boilerplate and what did they forget to tell me?

Any business counts on certainty in its contracts. In-house counsel must ensure that any agreement that their company enters into contains a clearly delineated set of rights and obligations. As a result, both internal and external lawyers pore over the minutiae of each contract, exchanging redlined drafts with points that may never have any relevance. This is only after the struggle over which attorney's basic form agreement to use as a starting point for an agreement.

Although this battle over the forms can seem like a waste of time and resources, it plays a crucial role in the ultimate agreement between the parties. This is because each lawyer's form contains a variety of “boilerplate provisions” that are simply cut and pasted from agreement to agreement. The term “boilerplate” connotes standardized, one-size-fits-all provisions. These “standard” provisions, which may be lengthier than the sections detailing the relevant economic terms, are generally not the subject of negotiation, or in some cases even review by the respective lawyers.

So how do these provisions find their way into a document in the first place? One commentator noted that they can be traced to an individual lawyer working on a document at 3 a.m., who scratches her head over the significance of a pari passu clause representation in her agreement, only to yawn and move on, comforted by the thought that someone at the firm must know why it is there. The document is, after all, the firm's standard form for this type of deal.

In-house counsel contribute to this phenomenon as well. When is the last time that a GC received (let alone approved for payment) an invoice charging for a review of the boilerplate or standard provisions in an agreement?

Transactional business documents have become increasingly complex and lengthy, at times requiring the same number of pages as a suburban telephone book. As one commentator recently noted, “the contracts themselves are intended to embody legally binding commitments of their clients, enforceable if necessary with all the majesty of the law. It is hardly the place where one would expect to encounter the casual, the unpremeditated, or indecipherable text.” But that is exactly what often appears, as boilerplate provisions have grown exponentially in recent years.

These provisions often appear under a "Miscellaneous" section in an agreement and may include choice of law and forum (yes, there is a distinction), merger and non-reliance provisions (which are often misunderstood as being synonymous), force majeure, dispute resolution, limitations of liability or liquidated damages, indemnification, assignment, notice and the like.

From the GC's perspective, it is "just the boilerplate." But these seemingly innocuous provisions may conceal business or legal implications that can radically affect the parties' rights in unexpected ways if not tailored to the specific facts and circumstances of the particular transaction at hand. By automatically including a boilerplate provision in a contract, counsel may unintentionally defeat the contractual intent of the parties and cause significant losses.

The merger clause as compared to the non-reliance provision

Merger clauses, also known as integration provisions, are fairly standard in commercial agreements and have nothing to do with the busing of students or the combination of two companies. The typical language may read similar to this statement: "This written agreement expresses the entire agreement between the parties with respect to the subject matter contained herein, and supersedes any prior written or unwritten agreements between the parties or their affiliates with regard to the subject matter of this Agreement."

Absent an integration clause, a party can argue letters of intent, memoranda of understanding and even oral promises or other statements made during negotiations as a basis for additional and unwanted contractual obligations. The integration clause is designed to ensure completeness, and to avoid later claims that other agreements exist outside of the parties' contract.

One common misperception, however, is that an integration clause can absolutely protect a party from a subsequent fraud claim. Indeed, courts are split on this issue, with law available to argue whichever perspective one wants to take. The differing opinions stem, at least in part, from confusion regarding the scope of non-reliance clauses and the general presence of such provisions in close proximity to a merger clause.

A non-reliance clause is also often included in a written agreement to preclude a party from raising the stakes by alleging fraud in what would otherwise constitute a breach of contract claim. This is important because a party seeking to avoid its contractual obligations can use the mere threat of a fraud claim as a bargaining chip. Generally speaking, although fraud claims may be easily alleged, they are difficult to dismiss on a pre-discovery motion or to disprove without expensive and lengthy litigation.

While integration or merger clauses are considered boilerplate provisions standard in most contracts and are generally not negotiated by either party, courts often ignore them in fraud claims. For non-reliance clauses, though, the trends are different, as courts are more apt to enforce such clauses. Traditionally, non-reliance clauses were enforced primarily in transactions involving the sales of investment securities. But today judges are inclined to enforce such a provision to bar a fraud claim in a wider array of circumstances. Ultimately, a party's ability to disclaim or limit its liability often depends on the law of the specific jurisdiction governing its relationship.

These are just a few of the types of provisions that may appear in the “Miscellaneous” section of a contract. Part 2 of this article will address how seemingly standard provisions can have a profound impact on a business relationship—and turn a “big deal” into a “big mess”.